Are International Funds Being Good For Current Market Environment?

The Indian equity markets have turned volatile in the last few months. In the same period, the Indian rupee has also depreciated against the US dollar. DSIJ explains how you can use International funds to diversify your portfolio and gain from the falling rupee. 

The recent market correction was just like a horrible dream for the investors which has snatched their peace and offered a worry to the investors regarding the returns they earn through the mutual fund investing and stock market investing. 

In the recent months the major equity benchmark indices Sensex and Nifty have recovered but still the mutual fund schemes are facing challenges to perform. Then where should investor invest, what are the potential opportunities for the investor. As of now if we see the equity funds from large cap, mid cap and small cap space are been underperforming the benchmarks and even the stretched valuations of the stocks won’t allow them to give better returns in near terms. So, investor need to curtail down their returns expectation from the Indian equity markets. 

But the question remains that how one can cope up with the situation how they can meet their financial goals for this instead investing more into the Indian markets one should look into the investing opportunities in the developed markets. 

For this international fund are the great option for investors which allows them to take exposure in the foreign equities. These funds are great options for diversification, but investors should know how these funds work. 

What are international funds? 

An international fund is a type of mutual fund which invests in firms in countries other than the ones they reside, so these funds are also called overseas or foreign funds. These funds are bit riskier as these funds invest in the foreign securities, but these are poised to garner higher returns in the longer run. 

Categories to invest in International Mutual funds 

International mutual funds invest in three ways geographically, thematic and direct. 

By Geography - 

The international funds invest across the geography differently. For instance, Kotak US Equity Fund - Direct (G) and icici prudential us blue-chip equity fund invests dominantly in companies/securities that are listed on the stock exchanges of in the UNITED STATES OF AMERICA. In the same way Edelweiss Greater China Equity fund invest in the securities from China. So, investors should always look where to invest before investing in these funds. 

Sectoral or Thematic - 

Some of the International funds invest in companies which are from a sector or theme which is expected to perform well. For instance, Gold fund, Real estate fund, Agriculture Fund, pharma fund etc. 

Fund of Funds or direct investment - 

Some of the international funds are fund of funds that is these funds invest directly in the funds instead of the companies. In this case Indian fund manager just collect or pool of investment from investors and invest in their parent fund which is managed by fund manager who is managing fund in the country where the money is invested. So, these funds are the good options as the fund manager who is managing the parent fund have a keen knowledge of fundamental attributes. 

So, now the question is does these funds are the good options for now? Are these funds being beneficial of reaping returns in the current market situation. For this we need to understand the current market situation and rupee depreciation and then we can conclude does these funds are good in current situation or not. 

First one need to understand what is a rupee depreciation and what the reasons behind it? If we see the Indian rupee has declined almost by 8% since January to June 2018. This was mainly due to the rise in crude oil prices, trade war between US and china etc. With this equity market have also tumbled in the last 6 months.
 

The Indian markets have a close relation with the Indian rupee and US Dollar. To analyse this relation we have gone through the last 10 year movement of Nifty 50, US dollar and Indian rupee. And we have analysed that Indian markets follow and negative correlation with the US dollar and positive correlation with the Indian rupee. And at the same time, we have also analysed the movement of the S&P 500 which is a major benchmark of US markets, it has a negative correlation with the Indian rupee and positive correlation with the US dollar. With this correlation if we consider the current market condition, with all the macro traps rupee has been depreciated which statistically indicates the good performance of the S&P 500 in the near terms. So, investing in the international funds could be a high return game for the investors. 

The risks these funds have currency risk, but in the current situation where INR is depreciated against US dollar, investors will benefit with this. That is, he can gain even in just the currency movements. Investor investing in the international fund invest in its local currency which is INR for Indian investor which is further changed to other currency, so he earns returns on every increase the international currency where he has invested. 

So current rupee depreciation also accounts for the wealth of the investors if they invest in international funds. So instead of redeeming existing equity investment one can invest in the international funds with a moderate exposure of 10%-15% to just safeguard returns and push the performance of the portfolio. US focussed equity funds can be one of the best bets among the international funds to negate the impact of rupee depreciation.
 

So, with above analysis we can conclude that for now investing in the international fund can be a good game for an investor but over exposure can be much risky, so investor should allocate the assets as per the risk appetite. At the same time if we see the performance level the category wont offer great returns in the very long term so investors should remember that once the current downtrends turns positive one can look into investment avenues in the Indian markets. Below is the performance of the various categories over the period of time